1. What is ethics and why it is important in global banking and business? Ethics represents and individual morality, in order words, it represents the reasoning of what is good and bad. With the history of fraud in banking and business, ethics may seem as a surprise for some people. Ethics is key in any type of company. Following the ethics principles will help banks and business to keep far away from the risk of being fined for any kind of poor behavior. A poor behavior in global banking and business can mean the crash of an economy worldwide as it happened in 2008 with the collapse of Lehman Brothers.
2. What was the case about? (Summary of the Case) After the Royal Bank of Scotland Group acquired ABN Amro in October 2007, both banks started posting massive losses, revealing lower than expected write-downs of £ 1.5 billion. On April 2008, Royal Bank of Scotland asked shareholders to pump in £ 12 billion of new capital, this being one the Europe’s biggest rights issue. To help the bank, the government took 58% stake in the bank. After this happened Fred Goodwin tries to resign, but it was denied, since he had to wait until his contract expired in March 2009. However, in November 2008, Fred Goodwin was replaced by Stephen Hester. After the government launched another a second rescue plan in order to increase the stake and keep shareholders happy, bank announces that the losses could be up to £28 billion. When the bank’s annual report presentment that Sr. Goodwin was paid £1.3 million in 2008, The Financial Services Authority launched a formal investigation, However, the FSA criticizes Fred Goodwin and other RBS executives for a “series of bad decision” and they escape any sort of punishment.
3. Who were the individuals and companies involved? The Royal Bank of Scotland Group case from 2008 involved two banks, the government, and the chief executive of one of the banks. One of the banks involved was the Royal Bank of Scotland, which provides financial services to personal, commercial and businesses. The company is headquartered in Edinburg, Scotland, and different offices in United States, South Africa, United Arab Emirates, Hong Kong, Amsterdam, London, and Singapore. The second bank involved in the scandal is ABN Amro, which serves as a retail, private and corporate bank, the primary focus of the bank is on Netherlands and some selective operations in the international market. The most notorious operations from the bank include private banking, energy, commodities & Transportation (ECT) and Clearing. On the other hand, the British Government, in which by the time the prime minister was James Gordon Brown, was also involve in this case.
The government had to launch an emergency rescue plan, in order to keep the bank, however, in doing so, the government would take off up to 58% in the Group, meaning having more than half of the power over the bank. After this plan, the bank kept presenting looses the government launched another plan, in which they would had to increase the stake in the bank. Among the individuals involved was the Chief Executive Officer of the Royal Bank of Scotland, Fred Goodwin who got the victory of acquiring ABN Amro. That decision provoked the group’s first loss in 40 years and pre-tax losses represented the second biggest banking loss in UK corporate history. After the government asked Mr. Goodwin to give up an annual pension of £700,000, the annual report presented that he was paid £1.3 million in that year. When the FSA tried to investigate the CEO they couldn’t find anything against him, since he ran before the taxpayer bailed it out
4. When and where did it happen and how much money was involved? The Royal Bank of Scotland Group case occurred in December 2007 until April 2009, when the FSA started the investigation. It took place in Edinburg, Scotland, here the company has its headquarters, from which the have every access to the international markets and investors od the company. The case involved an investment in acquiring the ABN Amro for £49 million, losses of £24.1 billion by the end of 2008, pre-tax losses of £691 million, with at least £25 billion in complex international tax-avoidance, causing the British and US treasuries more than £500 million in lost revenue. £1.3 million paid to Fred Goodwin. In addition, the government injected more than £45 billion, to keep the bank afloat. 5. Why did it happen?
In October 2007, the Royal Bank of Scotland Group won the battle of acquitting the ABN Amro against its rival Barclays. Even though a victory sounds great, this victory almost causes the end of one of the biggest bank in Europe, Royal Bank of Scotland. This victory was accepted by the majority of ABN Amro’s shareholders because of the price the group was willing to pay, £49 billion. Without taking any consideration about the market turbulence that led to the financial crisis in 2008, the Group directed by the chief executive, Fred Goodwin, said that the bank was in great shape, in order to eliminate any worries that the investors made had, but by the end of 2007 the bank of feeling the consequences of its bad decisions, and the bank revealed lower than expected write-downs for both banks.
Which led the group to ask shareholders to pump new capital after other £5.9 billions of credit crunch write-downs. The reaction of the Fred Goodwin, the chief executive of the bank, was immediate to his defense, and telling the group that he is the best man to keep the bank afloat, after all, the losses caused by his bad decision. When the government entered into action to help the bank, Fred Goodwin wanted to resign and escape from the disaster the was bank was involving. But it wasn’t until almost the end of 2008 that he was able to leave the bank. When the annual report said the Fred Goodwin said that he was paid £1.3 million on 2008, The FSA took and investigative action on the real emergency of the bank. 6. How did this case come to the attention of the media?
The case came to the attention of the media when the FSA didn’t give any punishment to Fred Goodwin, claiming that the disaster on the Royal Bank of Scotland Group was due to a couple of bad decisions from the directors of the group. The fact that the bank is the second largest bank in the UK and Europe and the fifth in the stock market value made the media more attractive to the history behind the crisis. Also, the acquisition made by the group represented the world’s biggest ever bank takeover.
However, it wasn’t until the FSA close the investigation in 2009, that the public react and led the FSA to continue the investigation, releasing a massive 452-page investigative report, analyzing what went wrong at the bank during the acquisition of ABN Amro. In addition, the fact that the government had to intervene and take 58% of the stake of the company, as a rescue plan, due to the emergency state that the group was facing by that time, also attract the attention of the public, to keep the news regarding the next step that the group was going to take. 7. What was the outcome of the case?
After the Financial Services Authority launched ta formal investigation on what really happened in 2008 with the bank, and the emergency rescues are done by the government in April 2009. By the end of 2009, the FSA criticizes Fred Goodwin and other executives for a series of bad decision during the financial crisis, and they escape any sort of punishment. Bosses at the Royal Bank of Scotland presented an apology to the investors, except the Fred Goodwin. The chairman of the bank, Tom MacKillop, expressed that the crisis wasn’t caused by the acquisition but it definitely added some difficulties to the group. MacKillop also added that he hasn’t experienced a crisis like this in his working life.
The bank’s shares collapsed so much, that the bank that was worth in £60 billion is their best era, by the end of 2008 was only worth a tenth of the £60 billion. Months later of the decision was given by the FSA, the bank was tied up, at least, £25 billion in complex international tax avoidance during boom years, this cost the government lost in revenue. But not only they were found with this tax-avoidance, but also, Fred Goodwin, that by that date was retired, was getting £700,000 a year pension. This type of deals or “organized trades” are used to make a profit from any tax avoidance. In additions, in 2009, the bank received more money, £25 billion, from the government increasing the public stake in the company to 80%. 8. How could this case be avoided?
The case could have been avoided if the group would have done better analysis about the vulnerable state of the market by the financial crisis of 2008 and 2009. By that date, there was an overall systemic crisis in which the bank was in their worse position, and that includes the Royal Bank of Scotland. Also, the deficiencies in the bank management led them to a series of bad decision, when part of the board are just willing to gain over its rival in order to get power, it must be a red flag for the governance of the bank, this include viewing the behavior of the executive or director, that instead of looking for solution, was defending himself as being the best man for the man, even though he caused one of the worst episodes of the bank in 40 years.
In addition, over-valuating an acquisition, would also hurt the bank as much as it did, as well as not taking into consideration the losses gained by adding more assets. Barclays stood out and said the Royal Bank of Scotland overpaid for the ABN Amro. And after the offer was analyzed, it was the world’s largest biggest ever bank takeover. All the case can be summarized, as a financial crisis of a bank due to the lack of research on the market, or as stated by the FSA “a series of bad decisions”. 9. What can we all learn from this case?
After analyzing the case, this in not a such a financial crisis due to not having moral, or by some insider trying to get more money in its pocket. This case gives us the lesson, that while making a decision, it would not only depend on the well-being of your company or bank, but it would also depend on the research done outside the company or bank, a study of your competitors, and the market as well. The case teaches us the importance of a SWOT analysis. From analyzing the strength of the bank among the competition to determine the opportunities available to close a deal.
In addition, we can learn, the importance of discovering the deficiencies in a bank or company management and governance since that it is easy to make the bad decision when you don’t have control of this aspect. When you led your desires of power against your competition, without taking into consideration the well-been of your company, you are the one that will be losing. Governance is the body of any type of company when they do not function together, they will never succeed, since they are projecting total different outcomes.
